Herbalife Longs Up Pressure On Bill Ackman

Herbalife Ltd. (NYSE:HLF) has had another strong showing in today’s mrket. The firm’s shares increased by almost 13% in today’s trading. In the last five days of trading, investors have seen the firm’s shares increase by more than 33%. Bill Ackman, who famously bet against the firm in December, must be questioning the future of that gamble.

According to the Wall Street Journal, Robert Chapman, Founder of Chapman Capital Management, has what he describes as a “monster long bet” on Herbalife Ltd. (NYSE:HLF). He put the bet on toward the end of last year, when he heard that Ackman was going short on the company.

Herbalife has still fallen by more than 20% since Bill Ackman announced that he was shorting the company. The tide has, very clearly, turned, since the days before Christmas. The short has successfully put downward pressure on the stock, but for Ackman, who put a target of $0 on the firm’s shares, it won’t be enough.

The thesis behind the Chapman long bet, is that Ackman will fail to cause a regulatory response, and will not cause distributors to abandon Herbalife Ltc. (NYSE:HLF). The firm’s business will remain solid and that means the company will not lose any real value due to the short. That will bring a short squeeze.

That squeeze is what investors going long on Herbalife Ltd. (NYSE:HLF) expect to make up their yield as they continue to stick by the company. Since December 26th, when the company began to make back its losses in earnest, the firm’s stock price has increased by 33.3%. Not a bad return for a single trade over the holidays.

According to Chapman, there is no clear Federal Statue against pyramid schemes. That means that Herblife operates in a grey area legally, and it wold be difficult for any regulator to easily convict them of malfeasance. This leaves Ackman far away from a real adjustment in the firm’s value.

Despite operating, as most investors have agreed, like a pyramid scheme, Herblife Ltd. (NYSE:HLF) still manages to pull in huge profits. This would need to change for the company to see a downward adjustment in real value. And this can only happen in two major ways according to Chapman, regulatory action, or reputaion changes resulting in lower demand for the firm’s products.

Neither of these is likely to occur in the short term, according to Chapman. The way this trade has gone makes it appear to be a much greater existential risk to Ackman’s Pershing Square Capital than it is for Herbalife Ltd. (NYSE:HLF). Ackman’s next move will be one of his most important in years. It is, of course, possible that he’s already changed his position. Regulatory filings will have to be seen before his actions are discovered.